Investors in agriculture will be no stranger to volatile pricing. But the unpredictable nature of soft commodities is usually down to weather events, not politics. Agriculture markets have rallied alongside their commodity cousins over the past year, with sugar at significantly higher levels today – thanks to production being disrupted by Brazilian and Indian weather events.
However, professional investors are warning that, in the near term, Donald Trump will have a bigger impact on soft commodity pricing than climate change.
“America’s two biggest trading partners when it comes to agriculture are Mexico and China – the two countries Trump is being most negatively outspoken about,” Henry Boucher, manager of the Sarasin Food & Agriculture Opportunities fund told Morningstar.
“It is not clear whether Mexico and China will carry on buying lots of American agriculture products if Trump instigates trade barriers between them. They will probably look to source their products elsewhere, places like Brazil or Russia, which could eventually affect food prices around the world,” said Boucher.
Imposing border taxes on imports would affect stock markets as well, said Gertjan Van Der Geer, senior investment manager of thematic equity with Pictet Asset Management.
“Agriculture plays an extremely important role for global trade partnerships. Placing restrictions on food trade is very risky. It also impacts food security – which is the guarantee that food production is safe and nutritious,” said Van Der Geer.
Rising Agriculture Costs due to Labour Shortage
Trump’s plans to cap immigration could also impact soft commodities – as producers could face a shortage of labour. The US agricultural system is reliant on migrant farmers from neighbouring countries, in particular Mexico. With fewer migrant workers, the cost of labour would increase, in turn increasing the cost of food production.
“Rising nationalism will lead to an increases in labour costs which could increase the price of commodities such as wheat, corn and soya,” said Nitesh Shah, director of commodities strategies with ETF Securities.
Shah added that there is a limited financial burden US farmers could bear as their cash income levels have dropped in the past year; meaning famers will be forced to transfer the cost to consumers.
Healthier Diets Drive Rising Demand for Salmon
It is often difficult to accurately gauge political risks or the impact of climate change on agriculture investment. But investors can look to capitalise on long term structural trends. Rising incomes in the developing world are fuelling an increasing demand for high-quality and healthier food products such as salmon, which require significantly more resource to produce.
“Demand for salmon is growing 6% a per year, because of changing diets. People are consuming less red meat and more salmon. Three quarters of salmon is farmed, but farming areas are very limited as you require shielded coast with fast flowing cold water and big cages, which are limited to areas like Scotland and Norway,” said Sarasin’s Boucher.
The Norwegian government also has a strict policy for granting salmon farming licences, which restricts supply. Farmers are not allowed to farm more than a certain number of fish per tonne of water – and can only go 5% over limitations if stringent environmental criteria are met.
Pictet’s Van Der Geer says that companies with salmon farming businesses present a sustainable buying opportunity.
